ShiftF5 wrote:
And most people will certainly not take the time to crunch the numbers and figure their expenses.

ShiftF5,

I do not understand this statement. It is easy to figure out a person's annual expense. Take the gross income, Take out the tax. Take out the savings. What is left is the annual expense. It is easy to calculate. As to whether people want to really know how much they spend, that is another matter.

Annual expense = gross income - tax - savings

KlangFool

In theory that is true, it should be easy to do, but people are funny creatures and as long as all your bills are paid and you have a positive balance in your checking account this is good enough for a lot of people. I will admit to being guilty of this for a long time. Now following this forum and having the light bulb go off over my head we track expenses pretty closely. Sometimes you don't ask the question if you don't want to know the answer.

Sorry, OP, but I would not use this (or similar) email to plan MY retirement.

First, what salary?.... gross, net (after tax), any other of possible variation?

Second, the 67yo above has reached $100K net salary (after tax), has $50K expenses, and (s)he retires because of that rule of thumb:

• $100K x 8 = $800K
• $50K expenses = 6.25% of $800K
• NO ONE in their right mind today, for a likely 20+ year period (age 87+), should tell you to withdraw in retirement over 6% from savings.

Third, all that matters is covering $50K expenses (or necessary/reasonble estimate) for several decades in retirement.

Fourth, forget rules of thumbs!!!!

Except that the 67yo with the 100k salary probably is going to get about $25k a year in SS. The remaining $25k in expenses is only 3.125% of $800k, which is pretty sensible. I agree that the rule of thumb has limited usefulness, but it actually would work in this case.

ShiftF5 wrote:
And most people will certainly not take the time to crunch the numbers and figure their expenses.

ShiftF5,

I do not understand this statement. It is easy to figure out a person's annual expense. Take the gross income, Take out the tax. Take out the savings. What is left is the annual expense. It is easy to calculate. As to whether people want to really know how much they spend, that is another matter.

Not sure why income even matters, as said before. Expenses are what matters.

But I'll play along. At 41, our savings are 6.2X my annual gross salary and 4.29X my annual gross salary/bonus. But since the bonus goes 100% into savings, I'm not sure that the first number isn't a better one.

As for expense, we're at about 12X expenses, or about 1/2 way to minimum retirement amount with a 4% withdrawal rate and not accounting for pensions and SS, of which will be pretty sizable for me as I have two very nice pensions.

At my target retirement amount, my projection is that we'd have 24X base salary and 53X expenses (all projected out to 2025 which would be an early retirement target for me). Plus two pensions that would be bringing in about $10k+/mo. starting at 65 plus two SS benefits that would be about $3K/mo a few years later. Those should cover 55% of our living expenses when we are that old with a SWD from our investments of just .6%.

Sorry, OP, but I would not use this (or similar) email to plan MY retirement.

First, what salary?.... gross, net (after tax), any other of possible variation?

Second, the 67yo above has reached $100K net salary (after tax), has $50K expenses, and (s)he retires because of that rule of thumb:

• $100K x 8 = $800K
• $50K expenses = 6.25% of $800K
• NO ONE in their right mind today, for a likely 20+ year period (age 87+), should tell you to withdraw in retirement over 6% from savings.

Third, all that matters is covering $50K expenses (or necessary/reasonble estimate) for several decades in retirement.

Fourth, forget rules of thumbs!!!!

They are not telling you to take 6% out. They are suggesting about 3.0-4.5% depending on expenses. Lets run through the math.You make 100k/yr and retire at 65. Your SS payment is 32k and your wife is 14k. That is 46k. Then you take 4% out of you 800k portfolio. That is 32k. That is 64(single)-78k(married) of income. If you figure the 100k person was paying 10% in payroll and other taxes and was saving 15%, that is pretty much a complete income replacement. For a number that you can spout off and people can instantly tell how much money they should have, it works pretty darn well.

If I were to live by this rule I would never want a raise as it would mean I would need to save more for retirement.
I believe you need to look at expenses. Also - some of our salaries vary so much year to year this 8x rule is meaningless - do I take the average? or the highest? Or if I am commission-based - do I only look at base salary or On-Target-Earnings if I hit minimum quota?

Sorry, OP, but I would not use this (or similar) email to plan MY retirement.

First, what salary?.... gross, net (after tax), any other of possible variation?

Second, the 67yo above has reached $100K net salary (after tax), has $50K expenses, and (s)he retires because of that rule of thumb:

• $100K x 8 = $800K
• $50K expenses = 6.25% of $800K
• NO ONE in their right mind today, for a likely 20+ year period (age 87+), should tell you to withdraw in retirement over 6% from savings.

Third, all that matters is covering $50K expenses (or necessary/reasonble estimate) for several decades in retirement.

Fourth, forget rules of thumbs!!!!

Nobody on this forum should be using this rule of thumb. That's not the issue. The question is whether the rule is so daft that Fidelity should take it off their site because even people who have no more than two minutes to think about the issue are better off not encountering the rule. I don't think it is that daft.

Even in your example, Landy, I think the rule provides decent guidance. It is clear that the rule refers to gross salary, so we'll take something like $140k, which yields a target of $1.1m. That may be less than you'd like, but for someone with a lifetime of SS earnings and no mortgage, it seems OK. It is a rough rule of thumb, not a micrometer. If you have half that, you may be in big trouble. If you have double, you probably don't have to worry too much.

As others have pointed out, this rule has problems. All rules of thumb are just approximations. But everybody uses them. And they can be useful to start your thinking. I'll illustrate how I've used them. I just retired. When I make this calculation, I have accumulated between 13x and 16x my annual earnings in my last working years, depending in part on which salary level I use, since my base was typically (but not always) augmented by a 15-25% bonus or overtime pay. By either criterion, however, I think my accumulation + SS is just fine. (I also have another reserve, based on an inheritance, which I am not drawing on. It's either insurance for me and my wife or it's a legacy for my kids if it stays whole.)

However, as I establish a withdrawal rate from my retirement savings I've found it more useful to begin with another rule of thumb, which says that to maintain your standard of living in retirement you need to generate income from your retirement funds + SS (and/or pension) that is 70-80% of your earned income near the end of your working career. Using this rule of thumb, with a target of generating 80% of my end-of-career income, then my (plus my wife's) SS generates about 1/3 of my "needed" income. So the operative question is, does my nest-egg safely generate the remaining 2/3 so that I will have 80% of my pre-retirement income? At this point it does, again without tapping that "reserve" that I mentioned, but applying a 4% rule (another "rule of thumb") to my accumulation in my first post-retirement year. So I feel good about things.

But then, of course, there are risks that this doesn't account for, in particular a bad sequence of returns on my investments or a sharp upturn in inflation. Also there's a risk of disability and the need for long-term care. I use a moderately conservative asset allocation. I have long-term care insurance. I can step down to 60-70% of my pre-retirement income in a pinch and or temporarily suspend putting an inflation adjustment on my withdrawals from retirement funds. Or, after a few years in retirement, I could decide to "pensionize" a share of my accumulation, by purchasing a string of SPIA's or a deferred income annuity.

So, there are still decisions to make in management retirement investments. It's not in the can. But thinking in terms of rules of thumb helps me to sort things out.

Last edited by Garco on Thu Feb 19, 2015 5:03 pm, edited 1 time in total.

The Fidelity "rule of thumb" has its faults, as others have noted, but if it serves as a "wake-up-call", it has accomplished its purpose. Your basic Boglehead probably has more than "8X". As a two-earner household (before I retired), I took the liberty of multiplying "8X" times two. We're roughly "8X" times three at present.

ginmqi wrote:
William Bernstein says you've won the game when you have 25x your salary saved. Sounds like a great goal to me!

Salary, or annual expenses?

As noted earlier in the thread, he said 25X residual living expenses, which he defined as anticipated living expenses less pensions and social security.

Do you recall what context he used this in? Expenses in today's dollars adjusted for inflation at your projected retirement year? Does he assume the fairly standard "death at 95?"
(PS which of his books is this discussed in? I've had him on my list of authors to pick up something, but haven't zeroed in on a particular one of his many books yet)

I agree with the others that a multiplier on your salary is a pretty loose rule of thumb. It's just too many steps away from the meaningful number, with too many ways it can go awry. Some people don't manage salary increases very well and their expenses increase disproportionately to their salary increases. Having a declining trend in your actual annual expenses as a percent of salary might be a good indicator.

I recall the Bernstein 25X rule. In my post prior to this one (earlier on this page), if I take out the 1/3 of my annual expenses that will be covered by SS, then the 2/3 of my annual expenses that remain is exactly 1/25th of my retirement accumulation. So my situation is consistent with Bernstein's rule of thumb.

In other words, there are several "rules of thumb" about retirement fund targets that are essentially different ways of defining the very same sum of annual income.

I am not sure how Fidelity got to this rule. But from a marketing perspective, telling the average investor to aim for 25x their salaries at retirement would be tantamount to inviting either indifference or derision, so it would not be effective.

EBRI's surveys show that of the people who do have retirement accounts, the median amount saved at the point of retirement doesn't even exceed $350,000. Median household income is slightly above $50,000, so that's retirement savings of about 7x income. Since this only covers the people who have retirement accounts, and EBRI observes that less than 50% of Americans even have any retirement accounts (which is not to say they don't have savings), how exactly are they going to tell people to save 25x in retirement money?

The kind of topics and discussion (Backdoor Roths, "Do you max your 401k," etc.) are indicative of how generally affluent the Bogleheads are.

ShiftF5 wrote:
And most people will certainly not take the time to crunch the numbers and figure their expenses.

ShiftF5,

I do not understand this statement. It is easy to figure out a person's annual expense. Take the gross income, Take out the tax. Take out the savings. What is left is the annual expense. It is easy to calculate. As to whether people want to really know how much they spend, that is another matter.

Annual expense = gross income - tax - savings

KlangFool

In theory that is true, it should be easy to do, but people are funny creatures and as long as all your bills are paid and you have a positive balance in your checking account this is good enough for a lot of people. I will admit to being guilty of this for a long time. Now following this forum and having the light bulb go off over my head we track expenses pretty closely. Sometimes you don't ask the question if you don't want to know the answer.

Many on this board know what their expenses are, but in my experience many people don't and won't discuss it.

That makes no sense to you and me, but ignoring the topic is not unusual.

ginmqi wrote:
William Bernstein says you've won the game when you have 25x your salary saved. Sounds like a great goal to me!

Salary, or annual expenses?

As noted earlier in the thread, he said 25X residual living expenses, which he defined as anticipated living expenses less pensions and social security.

Do you recall what context he used this in? Expenses in today's dollars adjusted for inflation at your projected retirement year? Does he assume the fairly standard "death at 95?"
(PS which of his books is this discussed in? I've had him on my list of authors to pick up something, but haven't zeroed in on a particular one of his many books yet)

I agree with the others that a multiplier on your salary is a pretty loose rule of thumb. It's just too many steps away from the meaningful number, with too many ways it can go awry. Some people don't manage salary increases very well and their expenses increase disproportionately to their salary increases. Having a declining trend in your actual annual expenses as a percent of salary might be a good indicator.

YDNAL wrote:Second, the 67yo above has reached $100K net salary (after tax), has $50K expenses, and (s)he retires because of that rule of thumb:

• $100K x 8 = $800K

The 67yo would have been forced out of this position and replaced with more exploitable labor at age 50. The idea most people's incomes keeping increasing all the way until retirement age is not very realistic for the majority of the population.

I have to chuckle a little at the posters that think it is so simple to know your expenses and plan for them years in advance. I did not know until a couple of months ago that my health insurance costs would increase by $4,080 this year and that we would lose another $5,000 because we can no longer deduct the cost of those premiums. Then we had to pay out over $2,000 in medical expenses when my college student son came home for Christmas vacation and ended up with appendicitis.

I am 60 years old and expect to work for another 6-7 years but I would not expect to predict our expenses in retirement within 25 percent. There is just too much uncertainty, just as there is with today's expenses. We will do what we do now: figure out how much we have to pay for base living expenses, make a guess on how much discretionary spending we can afford, and be prepared for unpleasant surprises.

YDNAL wrote:Second, the 67yo above has reached $100K net salary (after tax), has $50K expenses, and (s)he retires because of that rule of thumb:

• $100K x 8 = $800K
• $50K expenses = 6.25% of $800K
• NO ONE in their right mind today, for a likely 20+ year period (age 87+), should tell you to withdraw in retirement over 6% from savings.

Most 67 year old individuals facing retirement have been in the workforce for 30 or more years and will qualify for Social Security benefits. Using your example the retiree in question would probably receive somewhere between $20k and $30k in SS benefits, so the $800k portfolio would only have to provide for a withdraw of between 2.5% and 3.75% for the first year. The people at Fidelity Investments probably are aware that most retirees receive substantial SS benefits and have taken this into consideration if arriving at their rule of thumb.

ShiftF5 wrote:
And most people will certainly not take the time to crunch the numbers and figure their expenses.

ShiftF5,

I do not understand this statement. It is easy to figure out a person's annual expense.

I would wager that it isn't for most people. This is quite easy to say when you're 1) interested in it and 2) reasonably proficient at math.

But trust me, most people aren't. The purpose of "rules of thumb" are to make it easier for people to estimate - which is about as good as it will get for the vast majority of people.

Generating pages of arguments over how stupid the rule is, how "easy" the calculations are, or how people should "care more" is simply the worst kind of tilting at windmills.

moghopper,

I am agreeing with you. The problem is MOTIVATION. Most of people that I know are engineers. So, engineers definitely have no problem with those simple calculation. The problem is they are afraid of facing the truth. Aka, how much that they are spending and saving.

Sibelius wrote:I have to chuckle a little at the posters that think it is so simple to know your expenses and plan for them years in advance. I did not know until a couple of months ago that my health insurance costs would increase by $4,080 this year and that we would lose another $5,000 because we can no longer deduct the cost of those premiums. Then we had to pay out over $2,000 in medical expenses when my college student son came home for Christmas vacation and ended up with appendicitis.

I am 60 years old and expect to work for another 6-7 years but I would not expect to predict our expenses in retirement within 25 percent. There is just too much uncertainty, just as there is with today's expenses. We will do what we do now: figure out how much we have to pay for base living expenses, make a guess on how much discretionary spending we can afford, and be prepared for unpleasant surprises.

You are right to be skeptical. I'm retired, and I've seen this, too. That is why at best one can forecast income, which for many people also depends on the vagaries of market performance. And so for most people the longer-term goal for pre-retirement investment may be to replicate their (pretax) income after retirement. That is what all the "rules of thumb" speak to.

ShiftF5 wrote:
And most people will certainly not take the time to crunch the numbers and figure their expenses.

ShiftF5,

I do not understand this statement. It is easy to figure out a person's annual expense. Take the gross income, Take out the tax. Take out the savings. What is left is the annual expense. It is easy to calculate. As to whether people want to really know how much they spend, that is another matter.

At the finer detail level, you are correct. But, some expense will go down and some will go up. Pre-retirement expense is a good first order of approximation. When a person is approaching close to retirement, better estimate might be needed. 10 to 15 years or longer from retirement, any finer estimate is probably not accurate anyhow. For example, we would not how healthy that we will be.

ShiftF5 wrote:
Many on this board know what their expenses are, but in my experience many people don't and won't discuss it.

That makes no sense to you and me, but ignoring the topic is not unusual.

ShiftF5,

At one level, I understand them. And, I am speaking about engineers that make good money ( 6 figures). They do not want to know. If they do, they will know that if they cut their expenses, they could be rich. Hence, they have the choice. It is their decision all along. They rather believe that they are poor not by their own decision. I am living in a neighborhood where the median annual household income is 150K. But, many people are living paycheck to paycheck.

Sibelius wrote:I have to chuckle a little at the posters that think it is so simple to know your expenses and plan for them years in advance. I did not know until a couple of months ago that my health insurance costs would increase by $4,080 this year and that we would lose another $5,000 because we can no longer deduct the cost of those premiums. Then we had to pay out over $2,000 in medical expenses when my college student son came home for Christmas vacation and ended up with appendicitis.

I am 60 years old and expect to work for another 6-7 years but I would not expect to predict our expenses in retirement within 25 percent. There is just too much uncertainty, just as there is with today's expenses. We will do what we do now: figure out how much we have to pay for base living expenses, make a guess on how much discretionary spending we can afford, and be prepared for unpleasant surprises.

I was thinking the same thing as I'm reading this. I don't understand how a 35 year old would be able to predict income/expenses 30 years from now. When you compare the rule of thumb in the OP to the forecasting method, I have to say the rule of thumb seems a little more helpful.

Sibelius wrote:I have to chuckle a little at the posters that think it is so simple to know your expenses and plan for them years in advance. I did not know until a couple of months ago that my health insurance costs would increase by $4,080 this year and that we would lose another $5,000 because we can no longer deduct the cost of those premiums. Then we had to pay out over $2,000 in medical expenses when my college student son came home for Christmas vacation and ended up with appendicitis.

I am 60 years old and expect to work for another 6-7 years but I would not expect to predict our expenses in retirement within 25 percent. There is just too much uncertainty, just as there is with today's expenses. We will do what we do now: figure out how much we have to pay for base living expenses, make a guess on how much discretionary spending we can afford, and be prepared for unpleasant surprises.

I was thinking the same thing as I'm reading this. I don't understand how a 35 year old would be able to predict income/expenses 30 years from now. When you compare the rule of thumb in the OP to the forecasting method, I have to say the rule of thumb seems a little more helpful.

I always predicted income by an assumed average annual increase. I made adjustments along the way based on the reality of what happened each year. In the end I suppose I may have been off on my projection from 25 years ago, but over time I converged on the right answer.

As far as expenses are concerned, I'm not sure you need a really accurate estimate of those when you are in your 20's, or maybe even your 30's. At that time it's about saving as much as you can and investing wisely. I don't think I put together a retirement budget estimate until my late '30's, and that one was based on current income less savings and mortgage (we planned to have our house paid for), and then expressed it in terms of future year dollars based on my inflation assumptions. I used that estimating approach for many years. When I was a few years away from retirement I switched to a bottoms up budgeting approach, which was pretty close to my top down estimate that I'd been using for years.

Last edited by DFrank on Fri Feb 20, 2015 12:31 pm, edited 3 times in total.

DFrank wrote:As far as expenses are concerned, I'm not sure you need a really accurate estimate of those when you are in your 20's, or maybe even your 30's. At that time it's about saving as much as you can and investing wisely. I don't think I put together a retirement budget estimate until my late '30's, and that one was based on current income less savings and mortgage (we planned to have our house paid for), and then expressed in future year dollars based on my inflation assumptions. I used that estimating approach for many years. When I was a few years away from retirement I switched to a bottoms up budgeting approach, which was pretty close to my top down estimate that I'd been using for years.

This seems like a very sensible approach. It seems like a complete waste of time trying to anticipate potential expenses decades away from retirement. The closer you are to it, the less of an exercise in futility that becomes.

ShiftF5 wrote:
And most people will certainly not take the time to crunch the numbers and figure their expenses.

ShiftF5,

I do not understand this statement. It is easy to figure out a person's annual expense. Take the gross income, Take out the tax. Take out the savings. What is left is the annual expense. It is easy to calculate. As to whether people want to really know how much they spend, that is another matter.

Annual expense = gross income - tax - savings

KlangFool

Here is an easier method. I suspect that for most people, expenses are roughly 12 times your monthly take home pay.

My taxes are withheld, so they are not in take home pay. If I get a refund, it goes into savings, so it is not an expense. My savings are also deducted from my paycheck before I get it. Everything else goes through my checkbook. So I can get a good idea of expenses just by looking at the deposits in my latest checking statement. There are a few adjustments. About every 8 years I buy a new car, taking the money from investment earnings, which do not flow through my checkbook.

Then you will have to make changes to estimate your expenses for retirement.
Biggest change will be an increase in medical expenses.
You may plan an increase in hobby expenses, travel, and eating out.
Decreases might be commuting expenses, purchasing meals at work, professional dues, work clothes.
If your mortgage will be paid off, deduct your mortgage payment and add back in your real estate taxes.